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Reputations and credit ratings: evidence from commercial mortgage-backed securities

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  • Baghai, Ramin P.
  • Becker, Bo

Abstract

How do changes in a rating agency's reputation affect the ratings market? We study the dynamics of credit ratings after Standard & Poor's (S&P) was shut out of a large segment of the commercial mortgage-backed securities (CMBS) ratings market following a procedural mistake. Exploiting the fact that most CMBS securities have ratings from multiple agencies, we show that S&P subsequently eased its standards compared to other raters. This coincided with a partial recovery in the number of deals S&P was hired to rate. Our findings are consistent with the view that an agency can regain market share after suffering reputational damage by issuing more optimistic ratings.

Suggested Citation

  • Baghai, Ramin P. & Becker, Bo, 2018. "Reputations and credit ratings: evidence from commercial mortgage-backed securities," CEPR Discussion Papers 12648, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:12648
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    References listed on IDEAS

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    1. Michael B. Gordy & SØren Willemann, 2012. "Constant Proportion Debt Obligations: A Postmortem Analysis of Rating Models," Management Science, INFORMS, vol. 58(3), pages 476-492, March.
    2. Efing, Matthias & Hau, Harald, 2015. "Structured debt ratings: Evidence on conflicts of interest," Journal of Financial Economics, Elsevier, vol. 116(1), pages 46-60.
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    5. Jie (Jack) He & Jun (Qj) Qian & Philip E. Strahan, 2012. "Are All Ratings Created Equal? The Impact of Issuer Size on the Pricing of Mortgage-Backed Securities," Journal of Finance, American Finance Association, vol. 67(6), pages 2097-2137, December.
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    9. Milgrom, Paul & Roberts, John, 1982. "Predation, reputation, and entry deterrence," Journal of Economic Theory, Elsevier, vol. 27(2), pages 280-312, August.
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    12. Baghai, Ramin P. & Becker, Bo & Pitschner, Stefan, 2018. "The Private Use of Credit Ratings: Evidence from Investment Mandates," CEPR Discussion Papers 13418, C.E.P.R. Discussion Papers.
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    Cited by:

    1. Josephson, Jens & Shapiro, Joel, 2018. "Credit Ratings and Structured Finance," Working Paper Series 1236, Research Institute of Industrial Economics, revised 15 Feb 2019.
    2. Baghai, Ramin P. & Becker, Bo & Pitschner, Stefan, 2018. "The Private Use of Credit Ratings: Evidence from Investment Mandates," CEPR Discussion Papers 13418, C.E.P.R. Discussion Papers.

    More about this item

    Keywords

    commercial mortgage-backed securities; Competition; Credit ratings; information quality; reputation;

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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